Online brokerage firms aren’t much better. They offer free asset allocation tools, but those tools prioritize simplicity over financial rigor – in effect interpreting da Vinci’s thought in the most shallow fashion.To keep their work simple, they include too few asset classes (usually two or three) and round their asset class recommendations to the nearest 10%. This simplification reduces the number of possible asset class combinations, which leads to suboptimal recommendations and lower returns on investments.

There's a bunch of threads about "slice and dice" vs. "KISS", plus a page on the wiki: http://www.bogleheads.org/wiki/Slice_and_dice. I'm a middle-of-the-roader myself, holding 4 equity classes (TSM, Total International, plus small-cap-value and emerging markets tilts). But of course the Wealthfront guy would have to argue for his more complicated approach ... if you are going to "lump" what's their value add? Backtesting-based claims aligned to an agenda have to be taken with a grain of salt.

Wealthfront is not a serious outfit. They are a marketing firm. They keep changing their message hoping to get people to buy in. This is just their latest attempt to build a successful business model. Maybe someday if they find something that markets well they will stick with it; for now they keep shopping new marketing campaigns.

That aside, it is an open question as to whether or not slicing and dicing into sub-asset classes is worthwhile or not (note: sub-asset class, not asset class). If it is it must be done in a tax and implementation efficient manner. So for example might be worth doing in tax advantaged accounts if you can do so with no trading costs. Or at least rock bottom costs.

Believing you can make allocations to better than a rough approximation is nonsense. I'd trust someone who said, "Look, no one knows the optimal allocation with any precision, but I do think a solid dose of small value has a reasonable chance of being useful going forward. So let's split your domestic equity into TSM and SCV, say 2/3-1/3. Or if you want to be more aggressive 50/50. But remember SCV is expected to be more risky, so let's bump up bonds by 5%."

I would not trust someone who said, "Putting 8% into SCV is the wrong amount. It should 9.3%."

We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

boggler wrote:Is there any validity to this statement? Their website claims that using 7 asset classes rather than 3 will get you an extra 0.5% per year.

Theoretically, adding more less-than-perfectly correlated asset classes (with similar returns) to the portfolio should make it more efficient, with higher returns and less volatility. But in real life, the advantage of going beyond the basic Three Fund Portfolio is an open question.

For an example, see the six portfolios in the chart below, with data over twenty years from 1991-2011. Note that the simple three fund portfolio (Portfolio 3), with just U.S. equity, international equity and U.S. bonds, accomplishes 99% of the total return and 96% of the volatility reduction of the more complicated portfolio with six asset classes (Portfolio 6). Is adding 10% TIPS, 5% commodities and 5% global real estate really worth an additional 0.1% return advantage per year?

Source: Northern Trust

PS. Due to globalization, correlations among alternative risk assets have been increasing and excess returns shrinking, so their advantage to one's portfolio over the next 20 years may be even less. See Bernstein's, Skating Where the Puck Was.

Last edited by Simplegift on Tue Jul 02, 2013 8:19 am, edited 1 time in total.

Online brokerage firms aren’t much better. They offer free asset allocation tools, but those tools prioritize simplicity over financial rigor – in effect interpreting da Vinci’s thought in the most shallow fashion.To keep their work simple, they include too few asset classes (usually two or three) and round their asset class recommendations to the nearest 10%. This simplification reduces the number of possible asset class combinations, which leads to suboptimal recommendations and lower returns on investments.

Is there any validity to this statement? Their website claims that using 7 asset classes rather than 3 will get you an extra 0.5% per year.

I can believe this is true for numerous reasons. One of the top of my head is if you are using multiple asset classes you are likely diverifying into subassets that have a higher expected return, such as: SCV, REITS, EM, international small, high yield bonds on the bond side, etc... This, of course, will likely give a higher return in the long run thus the extra return annualized over time. Did not read the article, but would say that discussing return ONLY is a BIG NO NO. Even with the logic I presented it is in exchange for HIGHER risk.

Other reasons, could be: Rebalancing bonus which is likely greater for the more volatile and lower correlationg assets you add to a portfolio which likely would be greater with 7 assets vs. 3.

Good luck.

...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle

Online brokerage firms aren’t much better. They offer free asset allocation tools, but those tools prioritize simplicity over financial rigor – in effect interpreting da Vinci’s thought in the most shallow fashion.To keep their work simple, they include too few asset classes (usually two or three) and round their asset class recommendations to the nearest 10%. This simplification reduces the number of possible asset class combinations, which leads to suboptimal recommendations and lower returns on investments.

Theoretically, you should be able to get a better color gamut if you use four different colors of light instead of the traditional three (R, G, B). So, theoretically, you should get an improvement if you buy a display with four different pixel colors instead of just three. You really can't quarrel with the theory, and such displays actually exist: the Sharp Aquos Quattron, for one. And Google finds me some reviews that suggest that reviewers think the improvement is visible.

How many pixels colors does your monitor or TV use?

Do you know anyone who has a four-color model at all?

Anyone?

By the way, the theory involves some diagrams that look pleasingly like efficient frontier charts. In this one, the outer curve is the spectrum of pure wavelengths; the area inside represents all visible colors (all possible mixtures of spectrum colors). The kite-shaped area shows all of the colors that can be produced by mixing R, G, Y, and B light sources. With only three sources instead of four, you would only be able to produce the smaller range of colors in a triangle formed by connecting R, G, and B.

In short, you can improve your color gamut by diversifying your set of light sources.

Yes, I think there's some validity to the analogy, up to and including the question of, even if you grant that there's improvement, is that a lot of improvement or just a little, and is it worth the extra cost and complexity? (Stretching it even further... DFA fans would say that those stinky cheapjack Vanguard funds are impure light sources like the R, G, and B dots on the diagram, while DFA funds are positioned farther out, closer to the true spectral colors).